S&W Seed Company

Good day and welcome to the SMW Seed Company reports second quarter fiscal year 2022 financial results conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please also note, this event is being recorded. I would now like to turn the conference over to Robert Bloom with Lithum Partners. Please go ahead.

All right. Thank you very much, and thank all of you for joining us today to discuss the financial results for S&W Seed Company for the second quarter of fiscal 2022, ended December 31, 2021. With us on the call representing the company today are Mark Wong, President and Chief Executive Officer, and Betsy Horton, Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question and answer session. Before we begin with prepared remarks, please note that the statements made by the management team of S&W Seed Company during the course of this conference call may contain forward-looking statements within the meaning of Section 27A, the Securities Act of 1933 is amended, and Section 21E of the Securities Exchange Act of 1934 is amended, and such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results, or strategies, and are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipates, draft eventually, or projected. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements as a result of various factors and other risks identified in the company's 10-K for the fiscal year ended June 30th, 2021, and other filings made by the company with the Securities and Exchange Commission. With that said, let me turn the call over to Mark Wong, Chief Executive Officer for SMW Seed Company. Mark, please proceed.

Thank you, thank you, and welcome everyone to the call today. First of all, it is my great, great pleasure to introduce everyone on the call today to our new CFO, Betsy Horton, who actually has been here now three months, so not that new. She came right after the last call, so you all didn't get to hear her, but she is a wonderful addition to the S&W senior staff. She has a long history in agriculture, 20 years with Cargill, three years with a company called Miller Milling, which was in the wheat, obviously, business, and she was CFO there, and that was a bigger company than S&W, so she comes just with Huge credentials, a lot of energy, and the right background for the new S&W as we move into the future. Remember that in our model with Stevia and our Ingredion deal, we are not just selling seed now. We are also buying the leaf, the dry leaf from our farmers, and we're selling that to Ingredion in back-to-back contracts. As we move closer to the consumer and we embed ourselves in the distribution chain of these products, we really feel very, very lucky to have Betsy with us, the person who has a long history with Cargill, where looking at supply chain and all of those kind of things for ag products was a big part of what Cargill does. Welcome, Betsy, and thank you so much for joining S&W. Your energy and your inquisitive questions and your sort of making us all look at the industry that we've known basically for our lifetime is just a breath of fresh air, and we really do appreciate you joining the senior management of the company. Okay, on to my next point. I just want to make a few comments. Since the USDA has just come out with some projections for net farm income, I want to put this crazy market that we're all in with inflation and supply chain issues and all of sort of ag scratching their heads as other industries are. Just a few sort of grounding facts that we should all remember when we're looking at the industry. and companies like S&W that are part of that industry. So the USDA is saying that net farm income for 2022 is projected to be $113,114 billion. That's actually down $5.4 billion, or about 4.5% from the 2021 number of $119 billion. of farm, net farm income, and remember net farm income does include government programs and support from the government, from the federal and state government. It is important, though, to put these sort of projections in context. Twenty-one was a big increase in net farm income for farmers in the U.S., farm income in Net farm income in 2020 was only $94 billion. So 21 was about a 25% increase in net farm income for farmers. And as I said, 22 is about a 5% decrease. So while farmers are very optimistic about the crop that's being planted this spring in the Northern Hemisphere, It's also good to look back on history and remember that there were in recent history both years of higher net farm income and years of lower net farm income. So in 2016, 17, 18, farm income was fairly low. And in 2011 and 13, farm income was higher than it actually is in 22. So it's a pretty profitable cycle for farmers in the U.S. in 22, but not as profitable as kind of the best years of 2011 and 2013. And, you know, farmers are optimistic, but they're a little bit nervous. I mean, farm income is projected to be down, while expenditures, farm expenditures are projected to be up about 5%. So the farmer... is spending more to generate very good farm income, but it's less farm income at least projected by the USDA than there was in 2021. So in that context of that general market, and I would say that Australia sort of, while I don't have specific numbers, and the ag business in Australia is much smaller than the U.S. I would say our opinion is that the markets in Australia also reflect these general conditions. Higher costs, very good income, but not as high as maybe some other years. But farmers are optimistic, but they're a little bit worried that their input costs are increasing. And frankly, if you're in the animal protein business, it's feed that's higher. If you're in the row crop business, it's fertilizers, really, that have gone up in price because of cost increases. We all know what's happening to the price of oil and those kind of things. So that's the context in which we are operating S&W, in which we make, I make, and Betsy makes the report to you all today. So in the second quarter, which is our smallest quarter, remember, and that's because... In the third and fourth quarters, we're really selling seed for the spring planting in the northern hemisphere in the Americas. And because our business in Australia is really fall planted pasture products, you know, it tends to overlap on our spring planting in the U.S. in the northern hemisphere. And, you know, like all other companies who ship things long distances on water and by rail and by truck, COVID and supply chain issues have been a problem for us. It's pushed our sales back a quarter in general, and Betsy will go into some details about that. But net of all those difficulties, which we're managing, I think, fairly efficiently, we're still holding our guidance for the year of 80 to 85 million sales for the full year of 2020. We also obviously still have EBITDA smaller and smaller every year, but EBITDA losses, so gross profit margins in addition to sales, are a real priority for S&W. We believe that we have implemented price increases fairly across the whole product line that reflect our rising costs. We are also trying to control our costs at sort of all levels. That includes the cost of producing our seeds, the cost of running our own plants, our research and sales and marketing costs we are trying to hold tight on. And on freight costs, which gets a lot of public press, we've managed to try to control that in a couple of different ways, more efficient and more people sort of looking at getting shipments out to customers, passing on those freight costs to some of our customers where that's appropriate, and just making sure that we are on top of on a daily basis the freight situation, both availability and price as we move our products to the market. If there is a big mover, though, in the next year or two for S&W, it is our largest opportunity, the sale of double team sorghum. And as you all know, because we've talked about it in past calls, having a trait that is a herbicide trait is very, very valuable. There are a handful of traits in all of agriculture, and it is very unusual for a small company like S&W to have the wherewithal to spend the development time and have the management capability to basically bring a product like Double Team through the whole process and produce the seed and introduce it to our farmer customers. And that's the process that we're in right now. We're in a bit of a rising market. So the wind is at our backs in sorghum this year. The USDA has announced that the sorghum crop that was planted was about 7.3 million acres last year, which is up 24% from the 5.9 million acres that were planted the previous year. So farmers are kind of voting with their feet. Sorghum is a good alternative to corn. and the input costs are less, the water required to make a crop are less, and the economics of the grain price give farmers an excellent profit. So more acres of sorghum went into production in 2021, and we hope that that continues in 2022 spring planting, which obviously for the U.S. will be sort of in the April, May, June time, depending on where you are. in the latitude-wise in the U.S. So as I said, having a trait like this is very unusual for a small company. I can say in my career of 45 years doing this, I've been CEO of three other companies, and none of them owned their own trait. We did sell traits at my last company, which Monsanto purchased, And they purchased it because most of the traits we were selling were Monsanto traits. And they wanted to basically keep that margin sort of in our product. And so they bought the company that I built there. So we, at that company, which was called Emergent Genetics, we sold basically Monsanto and Syngenta traits. We did not have a trait of our own. So the fact that SNW has double team is fascinating. is the thing that every morning I wake up with a smile on my face and I thank all of our dedicated employees in research, marketing, and production who have helped us get through this six to eight year product development cycle and bring this product to the hands of our farmers. And you'll be hearing more about Double Team as we make and take market share in sorghum. So that's going to be a recurring theme to give all of you an update on the progress that we're making in our most exciting crop. On the alfalfa side, we're seeing strong demand. You know, alfalfa is really first and best uses to the dairy industry. Dairy prices are up for milk and cheese. And, you know, farmers want to buy good, high-performing alfalfa varieties because they can get milk yield from their cows by feeding the best high-protein feed. We are also seeing some rising prices, mainly because the last couple years where we had more inventory in the industry than really there was demand has finally sort of fixed itself, as Cargill likes to say. high prices, fixed supply. And so the prices in alfalfa are rising because supply is limited. And you'll hear from Betsy a little bit that there are some positives and negatives about this. For sure, we're shipping more crop out of our existing production for this year. So that's alfalfa seed production that's in the ground right now, yet to be harvested. The positive there is that we have more efficient use of our balance sheet, more inventory turns in alfalfa. The negatives are that we have timing is very important. We have to harvest the seed, clean the seed, coat the seed, bag the seed, and ship it to our customers all before their spring planting season, which are mainly the Middle East and North African countries are the main markets that we're selling into with our non-dormant alfalfa product. On Stevia, we continue to move forward with that. As I mentioned in my opening comments, we're very excited to have Betsy's expertise in the company. We think that basically selling seed to our farmers and then buying their output, which is the dry leaf, that contains the stevia sweetener, and then selling that to our partner Ingredion is a business that we want to do more of. And so, as I've also said, you know, we're looking at other things other than stevia to produce that we can take a position in the output that our farmers have. Some of those might be, you know, biofuel, green biofuels, or green... degradable plastics. Those genes are discovered already and we're taking a look at those. So, you know, it's a great situation with Ingredion. We have a belief in our product line that says we can produce dry leaf in the U.S. on a cost per pound basis that's competitive with China. That's something that no one ever believed would be possible given the cost of Chinese labor. But as I've talked on other calls, We have developed with our proprietary germplasm a production system that basically farms stevia as a perennial for a number of years. And then we're able to take multiple harvests off to spread the cost over more production and produce at a price that's competitive on a per pound basis with China. We also think that it's pretty clear from all the logistics issues that If you have a similar cost on a per pound basis, it's a pretty easy decision to sort of match local production to local markets. And that avoiding these supply chain issues, which, you know, are frankly not controllable by most small companies like S&W, we can get efficient there. We can control our costs as best we can. We can work with our customers on all of that, but we're not big enough to rent our own ships or have our own containers or have a fleet of trucks, and so we're dependent on third parties and all that. So having Stevia produced in the U.S. for a Stevia market that is the world's biggest. So in the U.S., Stevia is about a $900 million value crop. at the consumer level, those are really, we believe, valuable things for the future of SPW. As we see these kind of opportunities, so Stevia, better pricing, which, you know, may not be a long-term thing in Alfalfa, but for sure in the next few years, we believe we'll see that. And then the double team opportunity in Sorghum. It leads us to always raised the question that good companies have to ask, which is, should we be restructuring, refocusing the business? And I'll tell you right now, we're going through a process of taking a look at those three main crops that I've talked about, sorghum, alfalfa, and stevia, and making sure that we're doing everything we can to harvest the value that we're creating in those crops. And if that means we have to pay a bit of less attention to some other things, we're going to do that and you will hear about that story in the next couple of calls. So with that, those are my general remarks. And again, it is my great pleasure to welcome Betsy to the senior management team of S&W. And Betsy, I will give the podium over to you to make your comments on the financial specifics of S&W for this quarter. Thanks so much.